Good day ladies and gentlemen, and thank you for standing by. Welcome to Comtech Telecommunication Corp's Fourth Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Friday, October 7, 2016. I would now like to turn the conference over to Ms. Maria Ceriello of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp conference call for the fourth quarter of fiscal year 2016. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; Michael D. Porcelain, Senior Vice President and Chief Financial Officer; and Michael Galletti, our Chief Operating Officer. Before we proceed, I need to remind you of the company's Safe Harbor language. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the Company, the Company's plans, objectives and business outlook and the plans, objectives and business outlook of the Company's management. The Company's assumptions regarding such performance, business outlook and plans are forward-looking in nature and involve certain significant risks and uncertainties, including among others the risks that Comtech's and TCS's businesses will not be integrated successfully. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the Company's Securities and Exchange Commission filings. I am pleased now to introduce the Chief Executive Officer and President of Comtech, Fred Kornberg. Fred?

Thank you, Maria. Good morning everyone and thank you for joining us on this call. As announced yesterday afternoon, we reported our fourth quarter results of $152.4 million in revenues, adjusted EBITDA of $18.8 million and a GAAP diluted EPS of $0.14. For the year, our revenues totaled $411 million and our adjusted EBITDA was $48.1 million. Our GAAP diluted EPS for the full year was a loss of $0.46 per share given the $21.3 million of merger cost and integration expenses associated with our TCS acquisition that we recorded early in the year. I will leave it to Mike Porcelain our CFO to discuss our financial results in detail. But first I'd like to comment on the past year and our recent leadership changes. First I have to admit, I never expected to resume my role as CEO when I stepped down in December 2014. As most of you know, shortly after the Board conducted a strategic alternative analysis, Dr. Stanton Sloane, a Member of our Board took on the role of CEO. I was named Executive Chairman with Stan reporting to me and the Board. Just before Thanksgiving last year, we signed a merger agreement to acquire TCS, a company we had partnered in the past on various projects, and a company that perfectly fit the profile we were looking for. The acquisition took a tremendous effort in the midst of the challenging financing conditions we took on approximately $360 million of debt. We doubled our employee base and eliminated layers of TCS Corporate Executive Management which resulted in making the TCS business units more entrepreneurial but also more accountable. We also expect to more than double our current revenue and are targeting fiscal 2017 revenues at $600 million with an adjusted EBITDA of $70 million. During our…

Thanks, Fred and good morning everyone. For the full fiscal 2016 we finished at $411 million of revenue. Our fiscal 2016 includes approximately $151.4 million of sales as a result of the TCS acquisition. Of the $411 million of sales, 40.8% was generated from U.S. government customers, 30% was generated from international end users, and 29.2% generated from domestic commercial end customers. Our commercial solutions segment represented 60.6% of fiscal 2000 sales and our government solutions segment represented 39.4%. For the full year fiscal 2016 we finished with an aggregate of $451.3 million of bookings which translates into a full year book-to-bill ratio of 1.10. Our gross profit for the full year fiscal 2016 as a percentage of consolidated net sales was 41.7% and we reported a consolidated operating loss for fiscal 2016 of 600,000 as compared to operating income of $34.1 million for fiscal 2015. Excluding $21.3 million of expenses related to our acquisition plan which culminated in the acquisition of TCS, operating income for fiscal 2016 would've been $20.7 million or 5% of consolidated net sales. On a segment basis, operating income in the commercial solution segment was 9.3% of related segment net sales and operating income in the government solutions segment was 14.2% of related segment net sales. Consolidated adjusted EBITDA was $48.1 million or 11.7% of sales. At July 31, 2016 our backlog was $484 million. Given the size of the TCS acquisition, I believe our fiscal 2016 full-year results and historical trends are not meaningful. As such, I will focus the rest of my remarks in our Q4 2016 results because it includes a full quarter of TCS and I believe when you annualize it, it provides a good perspective to understanding our initial fiscal 2017 targets. Consolidated net sales for Q4 were $152.4 million.…

Thanks Mike. With the acquisition of TCS, our Company looks markedly different today. However at our core we still continue to provide advanced communication solutions for commercial and government applications. I believe our business is at a turning point and I'm excited about the growth opportunities that are ahead of us. With a combination of experience, careful planning and successful execution, I believe we will be able to drive significant shareholder value for many years ahead. The TCS acquisition was a significant step in our strategy of entering complementary markets and expanding our domestic and international commercial offerings. I expect to continue to manage the business through two segments commercial solutions and government solutions. I believe that the commercial solutions segment is a leading provider of one satellite earth station products such as modems and solid-state and traveling wave tube amplifiers. Two, public safety systems such as the next generation 911 technologies, and three enterprise application technologies such as messaging and trusted location based technologies. This segment on a long-term basis should approximate about 50% of our revenues and it is aligned with several large growing markets. Our satellite based communication products participate in the satellite cellular backhaul markets and in the single channel per carrier or SCPC modem area. We remain the undisputed leader in the SCPC market primarily driven by our proven ability to deliver the most bandwidth efficient modems and highest efficiency amplifiers to our end customers. Many of our Comtech satellite products are sold to international customers. These customers have recently been negatively impacted by challenging business conditions including some strong - including a strong U.S. dollar and relatively low energy prices. That said, during the fourth quarter of fiscal 2016, we experienced strong bookings in this area. So it appears that some stability has returned…

[Operator Instructions] And we take our first question from Mark Jordan with Noble Financial. Please go ahead.

Good morning, gentlemen. A question relative to your investment plans for fiscal 2017. What are you expecting to do with regards to capital expenditures and also R&D?

Yes, I think, Mark on the capital, although we're not specific with the number at this point, it’s going to be somewhere between $10 million and $15 million for the year.

Okay.

And on the R&D side, I think you’re going to see - still continue to see significant investments on the R&D side pretty much across all our product lines. So I think if you look at Q4 sort of a sense, you might see it increase from the level we did in Q4. But obviously, that number is impacted by timing of projects and so forth.

Okay. Fred ended up with comments on the TROPO market. I guess there are two segments for that. Any update with regards to what your expectations are on the international TROPO orders that have been floating around for a while? Secondly, with the domestic opportunities with the Army and the Marines, Fred mentioned something in the next 12 to 24 months. Do you know if there is funding in the fiscal 2017 budget for TROPO-enhanced SNAP terminals?

There's funding for SNAP terminals as they presently exist for the satellite area. There's also some funding that's being included in the next budget for the SNAP version of the TROPO terminal. As you know Mark, we’ve supplied a number of these terminals now. I think it’s probably in the order of 20 to 30 terminals together with TCS into Afghanistan and into the U.S. Army inventory. These are small numbers. But the Army does have a plan that they at least are in the process of getting funding for government fiscal 2017 to procure, I believe, it’s about 200 terminals. On the international side, I think we have a large pipeline of bids out there into various international countries and so forth. But there again, as I mentioned, in terms of the strength of the U.S. dollar and the low energy price value of oil these days, this is a difficult area for some of our customers to provide funding for these systems. So they've been kind of pushed to the right. At some point, I think, the oil will stabilize and the dollar will stabilize. And these projects must continue at some point.

What do you have in your estimates of revenue for fiscal 2017 for these large international TROPO and the domestic sales to the Army? Do you have much in there in that $600 million guidance?

No. And in fact, most of as Fred said, most of the projects we're thinking about might be booking in late Q4 2017. But we're not - we don’t have a large amounts of revenue in the 2017 target that we’re giving. Now obviously, things could come in a little bit earlier and that would be nice. But I think given the difficulty of predicting stuff, our view is to not include that number in our $600 million target.

Okay. Last question from me. Just talking about the next-generation 911 market, obviously, the five-year contract you got from the state of Washington is a very interesting one. Could you talk about the pipeline of opportunities you have that might be similar to the Washington decision and what might you expect to see decided here in the current fiscal year?

Obviously, it’s in the pipeline are primarily domestic states other than the state of Washington. We believe that the state of Washington gives us the entree as being the primary supplier in the next generation 911 contracts. But many of those are again, very difficult to predict almost similar to the international situation in terms of the funding for these programs and also for the regulations that also appear to be changing in some of these.

Thank you very much.

Thank you. And our next question will come from Stanley Kovler with Citi Research. Please go ahead.

Thanks for taking the question. I just wanted to focus a little bit on the changes in your business mix here in Q4. If you could just help us understand what happened more specifically between the government business and the commercial business. It seems like the government business actually put up decent revenue growth quarter over quarter. And then the commercial side grew. And then also if you can help us understand for just the TCS versus Comtech on the commercial side it looks like Comtech year over year was down, so excluding seasonality there. And what your outlook is on cash flow from operations for the year for 2017? Thank you.

Sure, Stanley. I think from our perspective, the numbers came in on the commercial side exactly where we were thinking. And on the government side, as Fred mentioned in his portion of the script, they did not achieve their bookings goal. So in fact, we had a little bit more optimistic revenue assumptions in the way we were thinking about it on the government side. That being all said, I think Q4 does reflect this tactical shift that we’ve been assessing and dealing with over the last few months. We certainly believe the government business is going to grow next year, and as well as the commercial side. And we think it’s pretty much blended across all of our product lines. So at this point, we don't believe that there's a meaningful difference to discuss legacy product lines or TCS product lines on a go-forward basis because whether it’s by coincidence or just the nature of the timing, we think low single digits is what we’re going to achieve across almost all of our product lines. In terms of mix profile, it again just by coincidence; the government business is roughly going to be about 40%. We think, going next year, plus or minus a couple of points same thing. Commercial will make up the difference. And obviously, mix and timing is going to change those numbers. But we think over the long-term, if we get some of these over-the-horizon contracts in 2018 and some of that stuff, you might see the government percentage increase from the current level to get to that 50-50 target on a long-term basis that we’re thinking about.

Thanks. If I could just follow up on the cash, I just want to understand what the outlook is for cash flow for 2017. You've paid down a portion of the debt with the proceeds from your offering, and you have a debt repayment schedule for the principal payment of the loan going forward with that covenant that you mention, the 275 net debt to adjusted EBITDA covenant. Marry that for us with the commentary in your 10-K about the dividend outlook. You had some language in the 10-K that was also released where you say you would begin to further assess your capital needs and what the appropriate level of dividends are. Can you help us understand how we should think about that? Thank you.

Sure. I think the way again, we’re thinking about 2017 as Q1 is going to be the lowest quarter of the year. It's traditionally that for Comtech in terms of our business and the TCS sort of looks like it plays out that way as well. So, we think that we’re going to consume some cash during the Q1 and Q2 before. From an operational perspective we start generating cash. So how much of that comes in to the operating cash flow by the end of the year, that’s difficult to say because it’s always a Q4 type issue. But when we take a step back and look at cash on a longer-term basis, I think you look at that $70 million adjusted EBITDA target, and you subtract out the interest expense, which on a cash basis is, call it, roughly 4.5%. And you back out any assume purchases of capital equipment and right now, we’re targeting somewhere between $10 million and $15 million a year. And then you subtract the dividend from it and that’s what we have to go with. Now we have $60 some odd million of cash on the balance sheet. And so our goal here at the end of day is right now the Board has set a target of 2017, which is the language we have in our 10-K. Yet at the same time, we're pretty excited about our growth opportunities. As everyone knows, we certainly didn't expect to sell our stock at $14 a share. So there's additional more shares that are outstanding since the $1.20 dividend target was established. So I think the Board very prudently is now assessing the dividend payment and what it should be on a go forward basis. And we’ll report back to you with any changes.

Thank you very much.

And we’ll take our next question from Mike Latimore with Northland Capital. Please go ahead.

Great, thanks a lot and congratulations on the good profitability and bookings in the fourth quarter there. Just you talk a little bit about revenue splits, commercial versus government. Should we think of EBITDA splits being similar to revenue splits or would one generally tend to be a little higher margin long term?

Yes. That's a good question, Mike. I think the government adjusted EBITDA margin in Q4 was actually pretty good, it's 14.6%. And I'd love that to continue. That does include a full quarter of the intellectual property fee, which comes in at 100%. So obviously, that’s not sustainable next year. So I think on an annual basis, we should be in the double-digits for the government segment. We don’t want to put out specifics but the remaining difference would be in commercial.

Okay. And then you are talking a little bit about a change in strategy from more high volumes of deals with high margin, maybe smaller size deals versus these larger government contracts. I just want to be clear, when you talk about maybe deemphasizing something, are you talking about the government services? And I guess that would be the first question. And the second, where would government services tend to trend over time? If that is the right way to think about it.

I think what you just said is really correct. What we're intending to do is really minimize the services business because of its low margin. We I think are going to focus our attention on maybe lower volume or lower cost programs that are more niche in our technology sector and get us a nice or better gross margin.

Mike to put some color on that and then just make sure there's no confusion in what we’re saying, we’re still going to be in the services business and the integration business. And we are - our value here is taking Comtech's hardware, our satellite equipment, our amplifiers and integrating it into solutions and services that the government would need. So if the government needs us to install stuff or maintain it and operate the stuff, we're going to continue to do that. I think when we're talking about a shift it’s on the commodity side. So if we’re doing something that doesn’t include our hardware, or doesn’t include our value. And I'll just give you a very simple example. If we are just going to go and put up a tent in Afghanistan, we’re not going to be putting up a tent. We’re not going to get any value-added for that. That's not going to drive long-term competitive advantage to us. So there were things that the historical business was doing that. We just don’t see a lot of value in it and a lot of margin. So Fred is going to shift the effort going forward into the areas that we’re good at doing and good at executing.

It’s primarily the pass-through business. The pass-through business that TCS has had in the past, I think, we will deemphasize where we have products that we can sell along whether its Comtech legacy products or TCS products. Obviously, those services will be fine.

Got it. So who is your tent supplier?

Pardon me.

I'm just kidding. I said who is the tent supplier, but I'm just kidding.

Do you need some camels?

There you go. And then you talk about some stability in I guess the traditional Comtech business. Is the number one macro factor there just the price of oil or can you elaborate on what might be causing stability?

I think what we’ve seen in the last couple of years, this is not a new problem but has been a problem for us in the last couple of years is really the strength of the dollar, making it difficult for our international business, which is primarily - some of our modem legacy business. As well as the oil dropping to one half of what those countries - the oil-producing countries we're used to. So all of their plans came to kind of a halt. Now slowly, I think I see a beginning of the contracts being lit but in a small way rather than still being at the old numbers. Sooner or later, the plans have to be initiated and that growth will come back.

Great, and just last question. In the fourth quarter did the telecom systems commercial services business grow year over year?

When you say services business commercial, are you referring to the over-the-horizon business or the TCS safety security side?

Safety security side.

Yes. The answer is yes. It did grow.

Okay, thank you.

[Operator Instructions] And we'll take our next question from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Hi, a lot of things have been covered already. Curious, though, with the change in strategy towards reducing some of the low margin business, does that use or can that help free up some working capital? Is there some reductions you can expect there which could help with the balance sheet?

Absolutely. That’s going to take a little time to happen. But yes, we would expect to see certainly, in 2008, the reduction in some of what I call the unbilled receivables and like. And that is one of the things that we are targeting to do, but it's not going to happen overnight.

Right. And I guess, secondly, perhaps you covered this and I missed it. You talked a little bit about the Heights and the SuperPower TWTA. Can you talk about the trajectory of the kind of market acceptance there? And is there - maybe with regards to what kind of expectations you have for those products for 2017?

First, let me say, traditionally, we've been in the SCPC business and not in the time division multiple access business. So as such, there's a market for both of these technologies. We’ve traditionally been in the SCPC, long-haul, high-throughput market. Now there's obviously a middle ground between these two systems. And this is what we’re trying to attack with both our Advanced VSAT that we introduced a couple of years ago and also the Heights platform. We believe the Heights platform will cover that middle market, which is the larger market for both the SCPC market and the time division market. So it’s kind of a thrust that we are doing to capture that middle market in between these two. Now the Heights platform is a derivation of the Advanced VSAT. And as such, it has many rollouts that we are in the process of doing. We're actually supplying the Heights platform today. But yet we still have a number of iterations and solutions that are in development which will roll out in 2017.

Okay, great. Thanks for that.

And it does appear we have no further questions. I’ll return the program to our speakers for any additional or closing comments.

Okay. Thanks again for joining us today. And we look forward to speaking with you again in December.